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Principles Of Economics A Streamlined Approach 3rd Edition Robert Frank, Ben Bernanke, Kate Antonovics, Ori Heffetz - Solutions

An economy is described by the following equations:(LO7)a. What is aggregate expenditure when Y = 600.b. Consumers and businesses alike become more pessimistic about the future and reduce their expenditures by 10 each. Immediately following this change, what is aggregate expenditure if Y is still
Data on before-tax income, taxes paid, and consumption spending for the Simpson family in various years are given below. (LO6)a. Find the Simpson household’s marginal propensity to consume.b. How much would you expect the Simpsons to consume if their income was $32,000 and they paid taxes of
According to Keynes’s assumption about the short run, firms that are experiencing a reduction in sales due to a recession will respond by: (LO5)a. lowering prices to bring sales in line with their production capacity.b. reducing production to meet demand at the existing price.c. charging higher
Of the following, identify the incorrect statement. (LO4)a. Output gaps are caused by inflationary pressures generated by the unintended side effects of government policy.b. Low aggregate spending can make output fall below potential output.c. When spending is high, output may rise above potential
From the homepage of the Bureau of Labor Statistics(www.bls.gov), obtain the most recent available data on the unemployment rate for workers aged 16–19 and workers aged 20 or over. How do they differ? What are some of the reasons for the difference? How does this difference relate to the decline
Given here are data on real GDP and potential GDP for the United States for the years 2003–2013, in billions of 2009 dollars. For each year calculate the output gap as a percentage of potential GDP, and state whether the gap is a recessionary gap or an expansionary gap. Also calculate the
From the homepage of the Bureau of Economic Analysis(www.bea.gov) obtain quarterly data for U.S. real GDP from four recessions: 1981–1982, 1990–1991, 2001, and 2007–2009. (LO1)a. How many quarters of negative real GDP growth occurred in each recession?b. Which, if any, of the recessions
Using Table 18.1, find the average duration, the minimum duration, and the maximum duration of expansions in the United States since 1929. Are expansions getting longer or shorter on average over time? Is there any tendency for long expansions to be followed by long recessions? (LO1)
Discuss three reasons why the use of fiscal policy to stabilize the economy is more complicated than suggested by the basic Keynesian model. (LO8)
Define the multiplier. In economic terms, why is the multiplier greater than 1? (LO6)
What is the key assumption of basic Keynesian theory? Explain why this assumption is needed if one is to accept the view that aggregate spending is a driving force behind short-term economic fluctuations. (LO5)
Which firm is likely to see its profits reduced the most in a recession: an automobile producer, a manufacturer of boots and shoes, or a janitorial service?Which is likely to see its profits reduced the least?Explain. (LO1)
Why is the traditional term business cycles a misnomer? How does your answer relate to the ease or difficulty of forecasting peaks and troughs? (LO1)
Use a diagram like Figure 17.4 (solid lines only) to show the effects of each of the following on the real interest rate and capital investment of a country that is a net borrower from abroad. (LO6)a. Investment opportunities in the country improve owing to new technologies.b. The government budget
How do each of the following transactions affect (1)the trade surplus or deficit and (2) capital inflows or outflows for the United States? Show that in each case the identity that the trade balance plus net capital inflows equals zero applies. (LO6)a. A U.S. exporter sells software to Israel. She
You have $1,000 to invest and are considering buying some combination of the shares of two companies, DonkeyInc and ElephantInc. Shares of DonkeyInc will pay a 10 percent return if the Democrats are elected, an event you believe to have a 40 percent probability; otherwise the shares pay a zero
Shares in Brothers Grimm, Inc., manufacturers of gingerbread houses, are expected to pay a dividend of $5 in one year and to sell for $100 per share at that time.How much should you be willing to pay today per share of Grimm: (LO4)a. If the safe rate of interest is 5 percent and you believe that
Simon purchases a bond, newly issued by the Amalgamated Corporation, for $1,000. The bond pays $60 to its holder at the end of the first and second years and pays $1,060 upon its maturity at the end of the third year. (LO4)a. What are the principal amount, the term, the coupon rate, and the coupon
The Federal Reserve System was created by the Federal Reserve Act, passed by Congress in 1913, and began operations in 1914. Like all central banks, the Fed is a government agency. Which of the following statements about the Fed is false? (LO3)a. The Fed has the power to supervise and regulate
Refer to Table 17.7. Suppose that the Fed had decided to set the U.S. money supply in December 1932 and in December 1933 at the same value as in December 1930. Assuming that the values of currency held by the public and the reserve-deposit ratio had remained as given in the table, by how much more
Answer each of the following questions: (LO2)a. Bank reserves are 100, the public holds 200 in currency, and the desired reserve-deposit ratio is 0.25.Find deposits and the money supply.b. The money supply is 500, and currency held by the public equals bank reserves. The desired reservedeposit
Redo the example of Gorgonzola in the text (see Tables 17.2 to 17.6), assuming that (1) initially, the Gorgonzolan central bank puts 5,000,000 guilders into circulation, and (2) commercial banks desire to hold reserves of 20 percent of deposits. As in the text, assume that the public holds no
During World War II, an Allied soldier named Robert Radford spent several years in a large German prisonerof-war camp. At times more than 50,000 prisoners were held in the camp, with some freedom to move about within the compound. Radford later wrote an account of his experiences. He described how
Arjay plans to sell a bond that matures in one year and has a principal value of $1,000. Can he expect to receive $1,000 in the bond market for the bond?Explain. (LO4)
Give two ways that the financial system helps to improve the allocation of savings. Illustrate with examples. (LO4)
Analyze the factors that determine international capital flows to understand how domestic saving, the trade balance, and net capital flows are related.
For each of the following scenarios, use supply and demand analysis to predict the resulting changes in the real interest rate, national saving, and investment.Show all your diagrams. (LO5)a. The legislature passes a 10 percent investment tax credit. Under this program, for every $100 that a firm
The builder of a new movie theater complex is trying to decide how many screens she wants. Below are her estimates of the number of patrons the complex will attract each year, depending on the number of screens available. (LO4)After paying the movie distributors and meeting all other noninterest
Ellie and Vince are trying to decide whether to purchase a new home. The house they want is priced at$200,000. Annual expenses such as maintenance, taxes, and insurance equal 4 percent of the home’s value. If properly maintained, the house’s real value is not expected to change. The real
In each part that follows, use the economic data given to find national saving, private saving, public saving, and the national saving rate. (LO3)a. Household saving 5 200 Business saving 5 400 Government purchases of goods and services 5 100 Government transfers and interest payments 5 100 Tax
Individual Retirement Accounts, or IRAs, were established by the U.S. government to encourage saving. An individual who deposits part of current earnings in an IRA does not have to pay income taxes on the earnings deposited, nor are any income taxes charged on the interest earned by the funds in
Ellie and Vince are a married couple, both with college degrees and jobs. How would you expect each of the following events to affect the amount they save each month? Explain your answers in terms of the basic motivations for saving. (LO2)a. Ellie learns she is pregnant.b. Vince reads in the paper
State whether each of the following is a stock or a flow, and explain. (LO1)a. The gross domestic productb. National savingc. The value of the U.S. housing stock on January 1, 2015d. The amount of U.S. currency in circulation as of this morninge. The government budget deficitf. The quantity of
Corey has a mountain bike worth $300, a credit card debt of $150, $200 in cash, a Sandy Koufax baseball card worth $400, $1,200 in a checking account, and an electric bill due for $250. (LO1)a. Construct Corey’s balance sheet and calculate his net worth. For each remaining part, explain how the
For each of the following scenarios, state whether the unemployment is frictional, structural, or cyclical.Justify your answer. (LO4)a. Ted lost his job when the steel mill closed down. He lacks the skills to work in another industry and so has been unemployed over a year.b. Alice was laid off from
Skilled or unskilled workers can be used to produce a small toy. Initially, assume that the wages paid to both types of workers are equal. (LO3)a. Suppose that electronic equipment is introduced that increases the marginal product of skilled workers(who can use the equipment to produce more toys
How would each of the following likely affect the real wage and employment of unskilled workers on an automobile plant assembly line? (LO3)a. Demand for the type of car made by the plant increases.b. A sharp increase in the price of gas causes many commuters to switch to mass transit.c. Because of
How would each of the following factors be likely to affect the economywide supply of labor? (LO2)a. The age at which people are eligible for Medicare is increased.b. Increased productivity causes real wages to rise.c. War preparations lead to the institution of a national draft, and many young
The table below lists the marginal product per hour of workers in a lightbulb factory. Lightbulbs sell for $2 each, and there are no costs to producing them other than labor costs. (LO2)a. The going hourly wage for factory workers is $24 per hour. How many workers should the factory manager hire?
Production data for Bob’s Bicycle Factory are as follows:Other than wages, Bob has costs of $100 (for parts and so on) for each bike assembled. (LO2)a. Bikes sell for $130 each. Find the marginal product and the value of the marginal product for each worker (don’t forget about Bob’s cost of
Data on the average earnings of people of different education levels are available from the Bureau of the Census (try online at www.census.gov/population/socdemo/education/tableA-3.txt). Using these data prepare a table showing the earnings of college graduates relative to high school graduates and
Explain how changes in the supply of and demand for labor explain trends in real wages and employment in the past few decades.
Write a short essay evaluating the U.S. economy in terms of each of the six determinants of average labor productivity discussed in the text. Are there any areas in which the U.S. is exceptionally strong, relative to other countries? Areas where the U.S. is less strong than some other countries?
We discussed how the opportunity cost of sending children to school affects the level of school enrollment across countries. The United Nations Human Development Report 2013 reports the following data for per capita income in 2012 (in the equivalent of 2011 U.S.dollars): (LO4)a. Which country would
The government is considering a policy to reduce air pollution by restricting the use of “dirty” fuels by factories. In deciding whether to implement that policy, how, if at all, should the likely effects of the policy on real GDP be taken into account? Discuss. (LO4)
Hester’s Hatchery raises fish. At the end of the current season Hester has 1,000 fish in the hatchery. She can harvest any number of fish that she wishes, selling them to restaurants for $5 apiece. Because big fish make little fish, for every fish that she leaves in the hatchery this year she
Harrison, Carla, and Fred are housepainters. Harrison and Carla can paint 100 square feet per hour using a standard paintbrush, and Fred can paint 80 square feet per hour. Any of the three can paint 200 square feet per hour using a roller. (LO3)a. Assume Harrison, Carla, and Fred have only
The Good’n’Fresh Grocery Store has two checkout lanes and four employees. Employees are equally skilled, and all are able either to operate a register(checkers) or bag groceries (baggers). The store owner assigns one checker and one bagger to each lane. A lane with a checker and a bagger can
Joanne has just completed high school and is trying to determine whether to go to junior college for two years or go directly to work. Her objective is to maximize the savings she will have in the bank five years from now. If she goes directly to work she will earn $20,000 per year for each of the
Consider the table below containing data for Germany and Japan on the ratio of employment to population in 1980 and 2010:Using data from Table 14.1, find average labor productivity for each country in 1980 and 2010. How much of the increase in output per person in each country over the 1980 to 2010
The “graying of America” will substantially increase the fraction of the population that is retired in the decades to come. To illustrate the implications for U.S.living standards, suppose that over the 53 years following 2013 the share of the population that is working returns to its 1960
Suppose labor productivity in the United States was$110,000 per worker in 2015. Calculate the value of labor productivity in the year 2035 (20 years later) if: (LO1)a. Productivity continues to grow by 2.6 percent per year.b. Productivity growth falls to 2 percent per year, its average rate during
Richland’s real GDP per person is $10,000, and Poorland’s real GDP per person is $5,000. However, Richland’s real GDP per person is growing at 1 percent per year and Poorland’s is growing at 3 percent per year.Compare real GDP per person in the two countries after 10 years and after 20
You have employed five workers of varying physical strength to dig a ditch. Workers without shovels have zero productivity in ditchdigging. How should you assign shovels to workers if you don’t have enough shovels to go around? How should you assign any additional shovels that you obtain? Using
Analyze whether having finite resources implies that there are limits to growth.
Evaluate government policies that promote economic growth.
Identify the costs of increasing economic growth.
The following table lists the actual per-gallon prices for unleaded regular gasoline for June of each year between 1978 and 1986, together with the values of the CPIs for those years. For each year from 1979 to 1986, find the CPI inflation rate and the change in the relative price of gasoline, both
Imagine two economies, A and B. In Economy A, technological improvements are rare, and the basket of goods and services that households consume is essentially unchanged from one year to the next. In Economy B, technology improves fast, and every year households consume goods and services that are
A recent report found that the real entry-level wage for college graduates declined by 8 percent between 1990 and 1997. The nominal entry-level wage in 1997 was$13.65 per hour. Assuming that the findings are correct, what was the nominal entry-level wage in 1990?You will need to use data from
According to the U.S. Census Bureau (www.census.gov), nominal income for the typical family of four in the United States (median income) was $23,618 in 1985, $34,076 in 1995, $46,326 in 2005, and $49,276 in 2010. In purchasing power terms, how did family income compare in each of those four years?
Here are values of the CPI (multiplied by 100) for each year from 1990 to 2000. For each year beginning with 1991, calculate the rate of inflation from the previous year.What happened to inflation rates over the 1990s? (LO5) 1990 130.7 1991 136.2 1992 140.3 1993 144.5 1994 148.2 1995 152.4 1996
Government survey takers determine that typical family expenditures each month in the year designated as the base year are as follows:20 pizzas at $10 each Rent of apartment, $600 per month Gasoline and car maintenance, $100 Phone service (basic service plus 10 long-distance calls), $50 In the year
Here is a report from a BLS survey taker: “There were 65 people in the houses I visited, 10 of them children under 16 and 10 retired; 25 people had fulltime jobs, and 5 had part-time jobs. There were 5 full-time homemakers, 5 full-time students over age 16, and 2 people who were disabled and
The nation of Potchatoonie produces hockey pucks, cases of root beer, and back rubs. Here are data on prices and quantities of the three goods in the years 2000 and 2005. (LO3)Assume that 2000 is the base year. Find nominal GDP and real GDP for both years. Pucks Year Quantity Price Root beer Back
Calculate the four components of expenditure and GDP for the following economy using data from the table below. (LO2) Consumption expenditures Exports $600 75 Government purchases of goods and services 200 Construction of new homes and apartments Sales of existing homes and apartments Imports
For each of the following transactions, state the effect both on U.S. GDP and on the four components of aggregate expenditure. (LO2)a. Your mother-in-law buys a new car from a U.S.producer.b. Your mother-in-law buys a new car imported from Sweden.c. Your mother-in-law’s car rental business buys a
MNLogs harvested logs (with no inputs from other companies) from its property in northern Minnesota. It sold these logs to MNLumber for $1,500 and MNLumber cut and planed the logs into lumber. MNLumber then sold the lumber for $4,000 to MNFurniture. MNFurniture used the lumber to produce 100 tables
How would each of the following transactions affect the GDP of the United States? (LO1)a. The U.S. government pays $1 billion in salaries for government workers.b. The U.S. government pays $1 billion to Social Security recipients.c. The U.S. government pays a U.S. firm $1 billion for newly produced
George and John, stranded on an island, use clamshells for money. Last year George caught 300 fish and 5 wild boars. John grew 200 bunches of bananas. In the twoperson economy that George and John set up, fish sell for 1 clamshell each, boars sell for 10 clamshells each, and bananas go for 5
“It’s true that unexpected inflation redistributes wealth, from creditors to debtors, for example. But what one side of the bargain loses, the other side gains. So from the perspective of the society as a whole, there is no real cost.” Do you agree? Discuss. (LO8)
Give two reasons why the official inflation rate may understate the “true” rate of inflation. Illustrate by examples. (LO7)
Al’s Shoeshine Stand shined 1,000 pairs of shoes last year and 1,200 pairs this year. He charged $4 for a shine last year and $5 this year. If last year is taken as the base year, find Al’s contribution to both nominal GDP and real GDP in both years. Which measure would be better to use if you
Apply the production, expenditure, and income methods for measuring GDP to analyze economic activity.
Which of the following would be studied by a macroeconomist? By a microeconomist? (LO3)a. The worldwide operations of General Motorsb. The effect of government subsidies on sugar pricesc. Factors affecting average wages in the U.S. economyd. Inflation in developing countriese. The effects of tax
Which of the following statements are positive and which are normative? (LO2)a. If the Federal Reserve raises interest rates, demand for housing is likely to fall.b. The Federal Reserve should raise interest rates to keep inflation at an acceptably low level.c. Stock prices are likely to fall over
The Bureau of Economic Analysis, or BEA, is a government agency that collects a wide variety of statistics about the U.S. economy. From the BEA’s website(www.bea.gov) find data for the most recent year available on U.S. exports and imports of goods and services. Is the United States running a
Over the next 50 years the Japanese population is expected to decline, while the fraction of the population that is retired is expected to increase sharply.What are the implications of these population changes for total output and average living standards in Japan, assuming that average labor
Baseball statistics, such as batting averages, are calculated and reported for each individual player, for each team, and for the league as a whole. What purposes are served by doing this? Relate to the idea of aggregation in macroeconomics. (LO3)
What type of macroeconomic policy (monetary, fiscal, structural) might include each of the following actions? (LO2)a. A broad government initiative to reduce the country’s reliance on agriculture and promote high-technology industriesb. A reduction in income tax ratesc. Provision of additional
Understand the difference between microeconomics and macroeconomics and how aggregation is used.
You are the president of Islandia, a small island nation that enjoys a comparative advantage in tourism. Trade representatives from the United States, which enjoys a comparative advantage in manufactured goods, have proposed a free trade agreement between the two countries.Manufacturing workers
(LO2, LO3)a. The economy opens to trade. The world price of automobiles is $10,000. Find the domestic quantities demanded and supplied and the quantity of imports or exports.b. Now assume that the government imposes a quota on automobile imports of 2,000 cars. What will happen to the quantity of
The demand and supply for automobiles in a certain country is given in the graph below. (LO2, LO3)a. Assuming that the economy is closed, find the equilibrium price and production of automobiles.b. The economy opens to trade. The world price of automobiles is $8,000. Find the domestic quantities
Suppose that a U.S. worker can produce 1,000 pairs of shoes or 10 industrial robots per year. For simplicity, assume there are no costs other than labor costs and firms earn zero profits. Initially, the U.S. economy is closed. The domestic price of shoes is $30 a pair, so that a U.S. worker can
An economy has two workers, Anne and Bill. Per day of work, Anne can pick 100 apples or 25 bananas, and Bill can pick 50 apples or 50 bananas. Anne and Bill each work 200 days per year. (LO1)a. Which worker has an absolute advantage in apples?Which has a comparative advantage? Calculate each
Suppose France has a comparative advantage in cheese production and England has a comparative advantage in bicycle manufacturing. How would you expect French bicycle manufacturers and British dairy farmers to react to a proposal to reduce trade barriers between Britain and France? (LO3)
A small, open economy is equally productive in producing coffee and tea. What will this economy produce if the world price of coffee is twice that of tea? Half that of tea? What will the country produce if the world price of coffee happens to equal the world price of tea?(LO2)
Explain how price of tradable goods is set in a closed economy or an open economy and how quantity demanded and quantity supplied affect the quantities of imports or exports.
A senator has argued that we should not spend hundreds of billions of dollars to reduce greenhouse gas emissions because we are not even sure that such emissions will lead to costly changes in the Earth’s climate.Comment critically on this argument. (LO3)6.* Suppose employers and workers are
Refer to Problem 3.Instead of taxing pollution, the city council decides to auction off four permits, each of which entitles the bearer to emit 1 ton of smoke per day. No smoke may be emitted without a permit. Suppose the government conducts the auction by starting at $1 and asking how many permits
Dave’s willingness to pay for hospital recovery time following his upcoming appendectomy is $300 for the first day, $200 for the second, $100 for the third, $50 for the fourth, and nothing for days beyond four. (LO2)a. If Dave is uninsured and the cost of providing a hospital room is $250 per
In the event he requires an appendectomy, David’s demand for hospital accommodations is as shown in the diagram below. David’s current insurance policy fully covers the cost of hospital stays. The marginal cost of providing a hospital room is $150 per day. (LO2)a. If David’s only illness this
A village has six residents, each of whom has accumulated savings of $100. Each villager can use this money either to buy a government bond that pays 15 percent interest per year or to buy a year-old llama, send it onto the commons to graze, and sell it after 1 year. The price the villager gets for
Barton decides to buy a full-sized grand piano. The new payoff matrix is as follows:(LO2)a. If Statler has the legal right to peace and quiet and Barton and Statler can negotiate at no cost, will Barton install and maintain soundproofing? Explain. Is this outcome socially efficient?b. Suppose that
Refer to Problem
Barton and Statler are neighbors in an apartment complex in downtown Manhattan. Barton is a concert pianist, and Statler is a poet working on an epic poem.Barton rehearses his concert pieces on the baby grand piano in his front room, which is directly above Statler’s study. The following matrix
John and Karl can live together in a two-bedroom apartment for $500 per month, or each can rent a single-bedroom apartment for $350 per month. Aside from the rent, the two would be indifferent between living together and living separately, except for one problem: John leaves dirty dishes in the
Suppose the law says that Jones may not emit smoke from his factory unless he gets permission from Smith, who lives downwind. The relevant costs and benefits of filtering the smoke from Jones’s production process are as shown in the following table. If Jones and Smith can negotiate with one
For each good listed below, discuss whether the good is likely to entail either an external cost or an external benefit. In addition, discuss whether the private market is likely to provide more or less than the socially optimal quantity of the good. (LO1)a. Vaccinationsb. Cigarettesc. Antibiotics

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